The Investment Picture Across The Pond

Wednesday, October 1, 2008 - 01:00

Editor: Please tell our readers about your background.

Hudson : My background is slightly unusual for a lawyer in that I have had essentially two careers. As a lawyer I've worked in three law firms all of which were start-ups. I started my practice with a law firm called S.J. Berwin in London, which at the time I joined was two or three years old. While I was there, I co-founded the private equity practice, which we grew over ten years or so to essentially the biggest team in Europe in that practice area. I then took seven years away from law to work in private equity, initially on the buy-out side, and lastly at Coller Capital, concentrating on the investment side as opposed to the legal side. I came back into law to re-establish O'Melveny & Myers' office in London. At the same time we established an office in Brussels and built up the European division to a profitable 70-lawyer group over three years. Then I was asked by Proskauer to set up an office in London almost a year ago.

Editor: Please describe your practice areas in the London office. How many people are in the London Office?

Hudson : Our office is focused on private equity, hedge and other pools of money. This translates into private equity and hedge fund formation work, and their transactions. We are slightly unusual again in that we actually do both - other equity-related groups specialize in one or the other. We have roughly 20 people in the office of whom ten are lawyers. This should double in the next year or so. Most of the staff are natives of the UK.

Editor: Is there any oversight body in London for the private funds?

Hudson : Yes, it is called the FSA - Financial Services Authority. It is actually the supervisory body for not only private equity and hedge funds, but also banks and other financial institutions as well.

Editor: Does your business come to you through referral from other Proskauer offices or is it mainly initiated from your own sources?

Hudson: The majority of our business is locally sourced - we represent about 30 private equity and hedge funds based here in London. Though our real focus is on private equity and hedge funds, we also do general M&A and banking.

Editor: There has been a slowing of LBO activity in the States since last summer. Has this also been true of the flow of business into London? Do you see deals from Dubai, Singapore and other financial centers seeking investors through the London Exchange?

Hudson : Yes, there has definitely been a slowing of capital market activity. We are not seeing deals passing through the London Exchange, arguably the stock market for international issuances, and there have not been many new listings on the London Exchange. But certainly Dubai, Singapore and other financial centers are trying to promote their own exchanges right now.

Editor: Do you see some opportunities now in what is happening in the States in terms of the investment banks aligning themselves with the commercial banks?

Hudson : Yes, obviously we represent pools of capital so there is a lot of opportunity right now for people with money, but there are a lot of falling knives that no one wants to catch. For example, Barclays Bank looked at Lehman Brothers and decided not to close that transaction until once it was in bankruptcy; then they took the pieces that they wanted. Basically they bought Lehman for $250 million. I thought it was very shrewd that they bought the Lehman building because it will always now be assumed that they bought Lehman.

Editor: Has the Club Deal structure remained a popular vehicle for private equity?

Hudson : At the big end of the scale of private equity, the answer is "yes," but there have not been too many big deals. The structure remains popular, but when people get scared, they generally do things on their own, which sounds counterintuitive. While our office has worked recently on three large deals, none of them have taken place. This gives you some idea of the market.

Editor: Are you continuing to see middle-market sized deals and how do they differ from the mega deals in terms of their popularity today?

Hudson : There is a view that middle-market deals would suffer less because there was less leverage, but they were always very leveraged too, so they are suffering as well - maybe not quite as much, but almost as much as the large LBOs. If you look at the statistics of deals that are consummated, you may see that they have done slightly better than large deals in terms of their numbers, but they are also suffering. There is more activity in emerging market LBO's because they were never very leveraged in the first place. For example, I worked on a large hospital group deal in Southern Europe that had much less leverage.

Editor: There is a great deal of money out there chasing very few deals. Where is it finding a home?

Hudson : It is not going anywhere - it is just sitting. There are huge amounts of money in private equity funds in both London and the States, but it is not being deployed.

Editor: Describe the ease with which a public offering takes place in London as compared with New York.

Hudson : There are three stock markets in London: there is the full market which is similar to your NYSE, the London Exchange. There is AIM for smaller issuers, then there is a small one called PLUS. The LSE is not dissimilar to New York in terms of stock issuance and the amount of disclosure required; the AIM is definitely easier - for example, a company doesn't need to have any trading history. The LSE is similar to the NYSE in terms of the requirements for listing on the Exchange.

Editor: Are you seeing a number of asset sales resulting from the financial crisis in New York, London and the EU which are attractive targets for venture and private equity groups?

Hudson : Yes, I think there are actually a lot of deals going on beneath the radar screen, particularly secondary transactions where pools of assets are being sold. These deals are not being reported. We're working on a few right now. The tempo of M&A activity in London is significantly down from where it was in 2007.

Editor: What is a favored exit vehicle for venture capital and private equity today?

Hudson : Trade sales, that is sales of companies to trade buyers. There is less selling to private equity funds because the secondary purchase of a company by a fund again relies on leverage whereas the trade buyer is using his own balance sheet with its own internal leverage or ability to take on new leverage.

Editor: How do you see the future of all corporate finance activity with the collapse of Lehman, the merger of Merrill with Bank of America and the implosion of AIG? Do you expect to see more acquisition activity on the part of equity funds or smaller financial institutions?

Hudson : There is one very distinct thing which I have been advising on for the last few days which is: what happens when an investment bank is a corporate finance advisor on the sale or an acquisition of a company and it breaks apart? Even worse, when the bank has promised to supply debt in a deal? Many of the Lehman clients have this concern. While corporate finance activity is significantly down just now, I think that what will happen is what happened ten years ago - a number of teams from the failing institutions will spin off and form corporate financial boutiques. Yesterday there were 100,000 bankers in London and today there are still 100,000 bankers in London - they will emerge somewhere or create their own houses. Many are just twiddling their thumbs or walking their dogs until the deal flow picks up again.

Editor: Is there a drive to bring investment banks under the aegis of the banks?

Hudson : We haven't any investment banks left because they all became part of U.S. institutions. About ten years ago there were investment banks in London with names like Morgan Grenfell, Kleinwort Benson, which were all taken out by American banks. Until a few months ago the biggest banks in London were Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Sterns - all from the States. These investment banks are global institutions - we no longer have a London Morgan Stanley. The banking community in the UK is largely split into essentially retail banks with investment bank divisions like the Royal Bank of Scotland or Barclays. The investment banking divisions are a lot smaller than their retail side. Or there are small stock brokers, what you might call broker-dealers, who act in a brokering or corporate finance capacity.

Editor: What advantages can Proskauer's London office offer clients looking to make acquisitions or seeking merger partners?

Hudson : First, our team is by and large made up of all locals. Proskauer designed our office to work with a strong local team rather than just being a branch of the U.S. offices. That is a major asset in attracting clients so that they know we're very well networked across Europe. Secondly, we act in London on behalf of private equity and hedge funds which right now have a lot of money, so we act on behalf of investments that are helpful to people.

Editor: Is there anything else you would like to add?

Hudson : If you look at London in the investment banking community, it is dominated by American investment banks, so really we've been quite affected in London by what is happening in the States, because the investment banking community over here is so American-owned. We do not have our own domestic investment banks anymore. Barclays is, first and foremost, a retail institution but has a very aggressive investment banking side, BarCap, which is obviously taking advantage of its position - having a retail bank associated with it is a big advantage in terms of always having capital adequacy. Royal Bank of Scotland bought ABN AMRO for about $25 billion and might have purchased Lehman for one-hundredth of that amount. I suspect Barclays and some of the UK banks with a retail base will actually pick up teams of investment bankers. Perhaps, the vacuum in investment banking will be filled by the incumbent retail UK banks. In terms of hedge funds I predict there will be more hedge fund failures because they rely on leverage and liquidity. The big issue facing private equity firms is two fold: (1). they can't execute deals because there is no leverage and (2) they are not getting any exits and therefore are not distributing new money back to their investors.

Please email the interviewee at mhudson@proskauer.com with questions about this article.